Aker ASA

OSE:AKER

Earnings Call Transcript 2021-Q3

[Operator]

Hello, everyone, and good morning. Welcome to this presentation of Aker's Third Quarter Results for 2021. We will start today's presentation with Aker's President and CEO, Oyvind Eriksen, will walk you through the highlights in the quarter and how the Industrial Holdings portfolio developed in the period. Our CFO, Svein Oskar Stoknes, will then cover the financial investments portfolio and the third quarter accounts in more detail. Oyvind will conclude the presentation by taking you through Aker's initiative to establish asset management as a new business segment in Aker's portfolio. There will be a Q&A session following the presentation. [Operator Instructions]And with that, I hand it over to Oyvind Eriksen.

[Oyvind Eriksen, President & CEO]

So thank you, [ Kim ], and good morning, everyone. It's been an interesting quarter, one in which Aker has entered into the offshore fish farming industry by joining forces with SalMar to establish SalMar Aker Ocean. Furthermore, Aker accepted an offer from KKR for our shareholding in Ocean Yield. The transaction will result in a cash release for Aker of NOK 4.5 billion and an annual return of 22% since the IPO in 2013.In the third quarter, Aker's net asset value ended at NOK 70.8 billion, the highest net asset value on record for the company for a second consecutive quarter. The value increase was mainly driven by growth in Aker Horizons, which was up 16.7%; Aker BP, which was up 4.9%, including dividend; and Ocean Yield, which was up 39.6%, including dividend in the quarter. In general, we're seeing high activity across the portfolio with high tender activity in Aker Solutions, Aker Horizons companies entering into strategic and vigil partnerships, and good momentum for growth across our Industrial segment.In the third quarter, Aker's net asset value increased by NOK 3.9 billion to NOK 70.8 billion or NOK 953 per share. For the first 9 months this year, the net asset value increase was 33% or NOK 17.4 billion, driven by growth in renewables, E&P, and software. One of the main contributors to the value growth in the quarter, Aker Horizons, was positively impacted by important and strengthening regulatory tailwinds like the Fit for 55 plan from the EU, Biden's infrastructure package in the U.S., and the U.K.'s Build Back Greener Net Zero Strategy. These are all designed to accelerate the energy transition and are clearly visible in the robust business development activities across the Aker Horizons portfolio. The second main contributor, Aker BP, was positively impacted by higher oil and gas prices, which led to a consecutive record-high operating profit for the company in the third quarter. The third contributor, Ocean Yield was positively impacted by the cash offer from KKR.The Aker share increased 9% in the third quarter to NOK 692 per share. This compares to a 4% increase in the Oslo Stock Exchange benchmark index. Aker's value-adjusted equity ratio at the end of the period was 85%, and 90% of our gross values were in our Industrial Holdings portfolio. Our liquidity reserves stood at NOK 2.1 billion and cash amounted to NOK 713 million.Adjusted for the Ocean Yield transaction, our liquidity reserves was NOK 6.6 billion and cash amounted to NOK 5.2 billion. Aker's gross asset value increased to NOK 83.5 billion in the quarter, with 83% in listed assets and cash. The Aker portfolio is highly liquid. Aker BP remains the largest asset in our portfolio at NOK 41 billion and continues to be an important source of liquidity, providing valuable upstream cash as we stake out our path in the energy transition and further develop our industrial software and technology platforms.As you can see, Aker Horizons is Aker's second-largest asset at NOK 15.5 billion and our software and digital technology-related portfolio is growing with the addition of Just Technologies. We have strong momentum for the opportunities and growth in the new parts of our portfolio. In total, software and renewables now are nearly making up 1/3 of Aker's gross asset value. Aker has growth platforms in multiple segments, while the hydrocarbon-related industries still account for the majority of our industrial Holdings. We are allocating more and more resources to industrial software, renewables, and clean technologies.For Aker BP, the overall picture is that the company continues to develop according to plan. This includes efficient operations that result in reduced costs, increased production, and better safety. In the third quarter, the company saw record-high operating profits and is on track to deliver on this plan for profitable growth. During the quarter, Aker BP and its license partners submitted a plan for development and operation, a PDO, for the Frosk project. The development will extend the lifetime of the Alvheim field, improve production and reduce unit cost.Another important project for Aker BP is the development of the Noaka area. In the third quarter, Aker BP and license partners made their final decision for the development concept and important milestone for the project, and the resource estimate has been increased to 600 million barrels of oil equivalents. Noaka, one of the largest remaining field developments on the Norwegian Continental shelf will be a hallmark for collaborative efforts between partners and with suppliers to have low emissions through power from shore and make extensive use of digital solutions in both the development and the operational phases. Aker BP announced last week, an increase in its annualized dividend level to USD600 million per year, effective as of the fourth quarter 2021, providing Aker with USD240 million in absolute cash annually, capital, which will be partly reinvested and partly distributed to our shareholders.Aker Solutions has had an eventful period with several important contracts secured across its business segments. Recent contract awards and the company's continued high tender pipeline illustrate a gradual change in Aker Solutions exposure as the company tilts further towards renewable and low-carbon solutions with a target of reaching 1/3 of revenues from these segments by 2025.Moving on to Aker BioMarine. After a slow start, the company experienced good harvesting conditions end of September. Aker BioMarine continues to expand its sales and marketing efforts to develop existing and new markets with prospective leads and new customers in addition to increasing sales to current customer base. The company continues to build its position in the U.S. consumer market, including Kori, which was awarded full storage distribution with 2 large U.S. retailers from the first quarter 2022. Kori was, in addition, launched on Amazon in August this year. Asia is also likely to be an important reason for both Superba and Krill Aqua going forward.Now on to Aker Horizons. The company strengthened its financial position during the quarter through an increased credit facility. And after quarter-end, through the sale of NOK 1 billion worth of shares in Aker Carbon Capture to several major international investors. High activity is a keyword while talking about Aker Horizons. During the quarter, the company entered into important partnerships and developed new opportunities to mature, grow and support its portfolio companies. Two examples being, firstly, the announced initiative to establish a green industry hub in Narvik, together with Aker. And secondly, the geographical expansion of its portfolio into areas like the U.K. and Northern Europe, notably with Carbon Capture and offshore wind.The fierce competition shaping up in the race to develop the energy transition highlights the importance of being part of a greater ecosystem, which supports wide cross-company collaboration and provides the skills and execution capabilities needed to succeed, and importantly, to deliver at scale needed if the ambition of Net Zero Emissions is to be met. Collaboration with other Aker companies, Aker Solutions, Cognite, and ACE, in particular, is a competitive advantage and a differentiating factor for Aker Horizons. Hence, we are confident that Aker Horizons is well-positioned to succeed in the ongoing energy transition race.Now moving on to our main unlisted assets, starting with our industrial software portfolio. First, Cognite. The company continued to grow its revenues in the quarter, supported by a rapidly growing customer base. The company secured a number of new commercial agreements with some of the world's leading industrial companies, including a new agreement with BP to provide a consolidated data layer for their well operations. Cognite hosted a few weeks ago, its global industrial digitalization conference, Ignite Talks, for the fourth year in a row. More than top 100 leaders shared insights with 25,000 attendees across a 3-day program.Our other software company, ACE specializes on application development for asset-intensive industries using Cognite's CDF technology. ACE Software applications operate on top of CDF to integrate and manage information related to field development and enable seamless exchange of data through the value chain and life cycle of fields. The company is actively working on the Noaka development alongside Cognite, Aker Solutions, and Aker BP. We believe this can be a landmark project for use of industrial software in asset-heavy industries at large.Lastly, over to Aker Energy. The company has matured and arised to the development concept where CapEx and breakeven cost of the project is substantially reduced. The company entered into an option agreement to acquire the FPSO Dhirubhai-1, and the target is still to submit a revised plan of development to the Indian government by the end of this year.During the quarter, Aker entered a strategic partnership with SalMar to establish offshore fish farming operations through a joint company, SalMar Aker Ocean. The strategic partnership with SalMar is a good example of how Aker's Industrial portfolio and ecosystem creates new opportunities. The new company combines Aker's leading industrial track record within the offshore developments and operations with SalMar's history as one of the world's largest and most efficient producers of farmed salmon. We have high aspirations for SalMar Aker Ocean and look forward to embarking on a new adventure to build a leading offshore fish farm globally, together with SalMar.That concludes my first portion of today's presentation. I now hand it over to Svein Oskar, who will take us through the financials for the quarter.

[Svein Oskar Stoknes, Chief Financial Officer]

Thank you, Oyvind, and good morning. I will start off spending a few minutes on Aker's financial investments before I go through the third-quarter results in some more detail. So the financial portfolio accounted for 10% of Aker's total assets or NOK 8 billion, which is up NOK 0.5 billion from the previous quarter. As before, the main components on the financial investments are cash, listed financial investments, real estate investments, and interest-bearing receivables, all of which I will now go through in some more detail.And starting with cash. Our cash holdings represented 1% of Aker's gross asset value or NOK 0.7 billion. This is up NOK 0.2 billion from the previous quarter. The main cash inflows were dividends received from Aker BP, Ocean Yield, and American Shipping Company of the equivalent to NOK 472 million. In addition, we had proceeds from Ocean Yield of NOK 51 million from the divestment of the 50% stake in 3 oil tanker vessels that we previously owned together with Ocean Yield through a joint venture. The main cash outflows in the quarter were investments in and loans issued to portfolio companies, totaling NOK 185 million.Payments for operating expenses and net interest were NOK 133 million in the quarter. And our liquidity reserve was NOK 2.1 billion, including undrawn credit facilities of NOK 1.4 billion. If you include our Ocean Yield transaction, the liquidity reserve was NOK 6.6 billion. Listed investments included in our financial portfolio represented about 1% of Aker's total assets at the end of the quarter or NOK 0.9 billion. The value of our positions in Philly Shipyard and Solstad Offshore decreased by $25 million during the third quarter. On the other hand, the value of the equity investment in American Shipping Company increased by $10 million during the quarter. And Aker posted a total dividend income from American Shipping Company of NOK 27 million.Next, real estate and other financial investments. Combined, the 2 represented 8% of Aker's gross asset value or NOK 6.5 billion in total. Other financial investments include NOK 2 billion loan and a NOK 1.2 billion convertible loan to Aker Horizons. The value increase is mainly explained by value increase in the bitcoin and blockchain technology company, CT of NOK 88 million. In addition to an investment in the software company, Just Technologies of NOK 50 million and increased interest-bearing receivables during the quarter.Then let's move to the third quarter financial highlights for Aker ASA and holding companies. And let me start with the balance sheet. The book value of our investments decreased by NOK 1.2 billion in the quarter. This is mainly explained by write-downs of the investment in Aker BioMarine of NOK 1.9 billion, partly offset by reversed write-downs of Aker solutions of NOK 554 million. The total book value of our assets was NOK 37.1 billion. And in our accounts, we use the lowest of historic cost and market values.The fair value adjustment showed in great color on this slide increased by NOK 4.9 billion in the quarter to NOK 46.4 billion. This is mainly explained by value increases of the investments in Aker BP, Ocean Yield, and Aker Horizons. The gross asset value stood at NOK 83.5 billion at the end of the quarter, which is up from SEK79.5 billion at the end of the second quarter. Aker's liabilities mainly consisted of bond debt of NOK 5 billion, a U.S. dollar-denominated bank loan of NOK 4 billion. Norwegian Kroner denominated bank loans of NOK 2.6 billion and NOK 1 billion euro-denominated loan. The book equity was NOK 24.4 billion, down NOK 1 billion, explained by the loss before tax in the quarter.If we adjust for fair values of our listed assets and Cognite, we get our net asset value of NOK 70.8 billion at the end of the third quarter, which is up NOK 3.9 billion from the second quarter. The net asset value per share was NOK 953 million and the -- sorry, kroner, and the value adjusted equity ratio was 85%. Our total interest-bearing debt was NOK 12.5 billion, which is up NOK 0.1 billion from the previous quarter due to foreign exchange adjustments. The average debt maturity at the end of the quarter was 2.3 years. Adjusting for the Ocean Yield transaction, a net interest-bearing debt was NOK 3.4 billion, and we still have significant headroom with regards to our debt covenants.Then to the income statement. The operating expenses for the third quarter were NOK 85 million. The net value change in the quarter was negative NOK 1.3 billion, mainly explained by write-downs of the investment in Aker BioMarine, partly offset by reversed write-downs of the investment in Aker Solutions. Our net other financial items were positive NOK 376 million, mainly explained by dividend income of NOK 481 million, partly offset by a net foreign exchange loss of NOK 90 million. And the loss before tax was then NOK 1 billion in the quarter.That concludes my portion of today's presentation, and I will now hand it back over to Oyvind, who will take you through Aker's asset management industry.

[Oyvind Eriksen, President & CEO]

Thank you, Svein Oskar. Now a few words about the announcement today regarding Aker entering into asset management as a new business segment. The backdrop is our history of industrial development and value creation. Since its establishment, 180 years ago, Aker has built and are continuing to build industrial companies based on what we do best, knowledge-driven industrial development, adaption to megatrends, and cooperation between companies, local communities, and skilled labor. Through 25 years of TRG's active ownership, Aker has continuously renewed itself to be a front runner in complex industries. The goal is to make a difference. History shows that Aker's active ownership has resulted in excess return to our shareholders with an average annual return of 26.4% since 2004.Aker's DNA is industrial development through generations and value-creating transactions. We are pleased with the positive development of our portfolio. At the same time, we recognize that the number of opportunities coming our way exceeds our capacity. We realize that our ability to create shareholder value through transaction can be institutionalized to become more scalable. In practice, Aker is already an active asset manager within an industrial base. At the end of the third quarter, Aker managed assets worth NOK 84 billion and is the largest owner of companies with a total value of more than NOK 200 billion.The breadth of Aker's current opportunities requires us to connect expertise and capital together with new constellations. Asset management could in conjunction with our industrial call, facilitate that. The kind of fund structures seen in asset management can act as a financial partner, which will enable us to realize opportunities and industrial projects that are beyond our company's current human and financial capacity. Hence, Aker is now establishing asset management as a new business segment.As a start, we will establish Aker Venture Capital and Aker Private Equity as the first initiatives. In addition, Aker Horizons announced last week that we are exploring the idea of setting up an energy transition and infrastructure fund together with a partner. Asset management will be organized into fund structures where each fund will be set up with its own capital base and separate teams. This involves a dedicated organization with experts within their respective mandate and decision-making processes that meet the governance requirements that external investors will expect and require.Venture capital will, as a first step, be organized with 3 vertical fund structures, start-up investments, industrial software, and industrial technology. Aker's Investment Director, Martin Bech Holte, will be heading up the Venture Capital segment. Aker has already demonstrated success with investment in Venture Capital. Cognite and ACE are good examples of this.In the same way, we have taken the first step within private equity with OrbeNovo, which in Latin for -- means new world. OrbeNovo will be led by our Co-Founder, [ Khash Mohajerani ], and Bob Dudley has accepted the role as Chairman of the Board. Private equity has emerged as an increasingly important part of active asset management and has several similarities with Aker as an industrial investment company, including the use of transactions, optimize the capital structures, and active ownership as tools for value creation.Aker's industrial holdings will continue to be the core of Aker, latest illustrated by the recently announced green industrial investments of Aker and Aker Horizons in the Narvik region, an opportunity that would not have existed if Aker was a pure asset management company. The combination of Aker's long-term commitment, access to resources, adaptability, and drive makes it possible.Venture capital will initially be organized with 3 vertical fund structures. Together with [indiscernible], we have established a runway form for start-up investments in software and technology companies with the first fund of NOK 300 million funded entirely by Aker. The aim of [indiscernible] is to support entrepreneurs setting up their company and simultaneously give Aker a unique window into the next wave of industrial innovation and industrial technologies. In addition, we will establish access to invest venture capital in software companies specialized in industrial data that are at the latest growth stage.Our Cognite partner and CEO, John Markus Lervik, will be involved as Chairman of Axis, in addition to his continued role as CEO in Cognite. Clara will be our structure for venture capital in industrial technology with the aim of creating new growth companies. We have put in place a competent management team through the acquisition of Prototech and Abalonyx, led by Bernt Skeie. Abalonyx, which today is changing name to LayerOne and companies developed out of Prototech, will be the first building blocks in the Clara fund.The venture capital portfolio will initially be funded entirely by Aker. As soon as we have established a successful track record, we will, however, invite external capital to -- and external investors to invest in the fund. Our private equity business, OrbeNovo, will be established with headquarter in [indiscernible]. OrbeNovo will have a broad investment mandate that, and among other things, will invest in companies in fast-growing industries with Aker as the cornerstone investor in the first one.As you understand, it's exciting times in Aker. So let's discuss that in a greater level of detail, as we now open up for Q&A.

[Operator]

Thank you, Oyvind, and sounds good. We'll now move to the Q&A session. Okay. From [ Michael Gilkins ]. Can you give us some more color on the composition of other financial investments, which include ACE, AB, and CT amongst others? Can you provide a breakdown?

[Svein Oskar Stoknes, Chief Financial Officer]

Other financial investments, you have the NOK 3.2 billion, which makes -- absorbs the brunt of it, which is a shareholder loan of NOK 2 billion to Aker Horizons and then you have a convertible loan of NOK 1.2 billion and the remaining spread across a portfolio of unlisted companies, Aker Energy, just BP others. In terms of the exact breakdown of it, I'm happy to provide it to you, but I can do it after the call.

[Operator]

Second question from [ Avian Forgera]. And firstly, congratulations on a great quarter. Can you please shed some light on Cognite's joint venture with Saudi Aramco?

[Oyvind Eriksen, President & CEO]

Sure. So all agreements have now been signed, and we are about to -- all approvals have been obtained. And we are now in the process of commencing business activity in the joint venture. And Aramco is obviously already a very important customer of both Cognite and the joint venture, but we are in advanced dialogue also with other asset-heavy industries and companies in the retail. So it has -- the timing has been somewhat impacted by the unfortunate COVID-19 situation. But now we're back on track and looking forward to supporting the JV and follow the development in the months and years to come.

[Operator]

Next question from [ Erik Tuesta ]. Would you like to share any ambitions for Aker Asset Management in terms of AUM and the fee structure?

[Oyvind Eriksen, President & CEO]

Well, we will -- we announced today that asset management will be a new Industry segment in our portfolio going forward. We have some initial initiatives, both in venture capital and private equity. We're in the process of recruiting teams, both to the specific funds, but also to help us developing asset management as an important part of Aker going forward. So it's too early to quantify assets under management, but we're looking forward to coming back to our shareholders and analysts, and give you more details as we develop the plans and the opportunities going forward.

[Operator]

From Frederik Lunde, Carnegie. Can you give us some more flavor on Aker Energy key decision gates or milestones?

[Oyvind Eriksen, President & CEO]

As I said in my presentation, and the goal is still to submit a PDO by the end of this year. And in parallel, we are in dialogue with -- continued dialogue with GMPC about a possible transaction-based authorization granted to GPC by the Ghanian parliament a few months ago. So we are developing the project and Aker Energy along -- according to the plans we have previously communicated.

[Operator]

Next question. It seems Aker did not participate in Aker Horizons placement yesterday.

[Oyvind Eriksen, President & CEO]

Sure. But that was a small equity issuance and actually initiated by some large institution investors knocking on our door. So we consider it as a benefit also to Aker ASA to expand the ownership structure and inviting long-term institutional investors who can support Aker Horizons development together with Aker and going forward.

[Operator]

Yes. I think that concludes the Q&A session for today. Thank you.

[Oyvind Eriksen, President & CEO]

Thank you.

[Svein Oskar Stoknes, Chief Financial Officer]

Thank you.